Well, good morning, everybody. Welcome to this pretty hot day. I can see everybody's dressing down a bit. I'll take my towel for a minute, too. As usual, I'm Stephen Harris, Group Chief Executive, for anybody who doesn't know, and on my right is Dominique Yates. We shall pile through these sizzling results. How about that for a pun? Sorry about that. So, agenda, as usual. I'll do the highlights, and then Dominique will come up and do the financial review, and then I'll come back and talk to you from the business review. Then we'll do a summary and outlook. So, moving straight into it. So, the results themselves. So, we've got nearly 9% revenue growth to GBP 368 million, and 15% growth in the profits. I think a notable feature is our margin expansion.
This, of course, is a continuation of what we've been doing for quite some time, and we'll come back and talk about that a little bit at the end. EPS growth, 16%, and free cash flow, GBP 39.4 million. And of course, Dominique will go into some detail on the numbers. Just talking about developments, because one of the issues that I think I'd like to make clear to people is that a lot of our results are being driven by things that we are doing as opposed to the background. And you can see that in the various sectoral numbers.
I mean, we're well ahead of the market, and we'll talk about why as we go through this. But so in the first half, further GBP 16 million of expansion CapEx, which will come forward and yield over the future years, in addition to the work that we've already done.
Our CapEx expansion program is ongoing, as indeed is our resources program. Specialist technologies, back up to double digits, and of course, that's the kind of number that, we expect, is double-digit to growth that and higher. It's pleasing to see the emerging markets revenue growth at 22%, and we'll talk a little bit about what's driving that. We are having a dividend of GBP 0.057 at the half-year here, which is an increase of 8%. With that, I'm going to hand over to Dominique, and I'll come back and talk to you again in a minute.
Thank you, Stephen, and good morning, good morning, ladies and gentlemen. So Chart 6 summarizes the group's financial results. Stephen's already referred to the revenue growth with the positive impact on headline operating profit and group margins, and Stephen's already also highlighted that we delivered a 16% increase in headline earnings per share. So I'd say that all of the group's key metrics are pointed in the right direction at the moment. One thing I did just wanna say a word about is the half-year growth rate versus that at the trading update. We have 8.7% growth in the first half versus 10% that we announced at the time of our trading update for the first four months of this year.
But I remind you that the 2017 equivalent growth rates for the same periods were 3.9% in the first four months and 4.8% for the first six months, organic growth rates, so constant currency. So there is no slowdown in the business that one could impute from that slight easing in the growth rate. It's merely a fact, and we will see this going through the second half as well, that the business was growing through last year, quarter on quarter on quarter, and therefore our comparatives are getting tougher as we go through the year. Chart 7 shows the operating profit bridge. So even in the context of this more inflationary environment, once again, we've managed to more than cover cost inflation through price increases. We see an improvement in our underlying business, which contributed to a further GBP 5.5 million on the operating profit.
And we've also enjoyed strong positive contribution from the maturing of new facilities, defined here as those that have become operational since the beginning of 2015, and more on that later. Chart 8 shows the divisions' performances. In summary, both divisions have enjoyed strong performance with very similar revenue growth at constant currencies. The impact of Sterling's relative strength versus last year has impacted the ADE division more than the AGI division since a greater proportion of the ADE business is dollar-denominated versus the AGI division. The AGI division demonstrated impressive margin growth, and it's continuing to close the gap versus the ADE margins. The AGI-ADE margins, in turn, also delivered a nice improvement. Chart 9 shows the group's results by major currency, with profits from the Eurozone representing almost half of the group's operating profit.
We've included the average rates, year to date on the chart as well, so that as exchange rates develop, you will have an idea of the prorated impact on the group's operating profit. Based on where exchange rates are today, we're now anticipating a GBP 2 million negative impact on operating profit for the full year compared with the 2017 exchange rates. Chart 10 is a reminder of our investment priorities, where we're investing behind long-cycle Aero programs, specialist technologies, and emerging markets. Naturally, a number of our investments are actually across more than one of these priorities, so for example, the successful addition to LPC capacity in Mexico is an obvious example. So overall, just over half of our total CapEx was invested behind growth projects in the half, bringing the total organic investment behind growth to more than GBP 140 million since the beginning of 2014.
Chart 11 then shows the sales development of all of these new facilities opened since the beginning of 2014. There were 12 of them. We invested Aeround GBP 45 million in those facilities. And as you can see from this chart, we were generating annualized revenues from those facilities in the first half of this year of just over GBP 25 million. And by the way, just to reinforce the message above regarding our investment priorities, 10 of these 12 facilities responded to one or more of the investment priorities that we already outlined.
So based on our rule of thumb of GBP 1 invested in classical heat treatment equating to GBP 1 of mature revenue and a somewhat healthier equivalent ratio for specialist technologies, you'll see that we're on track to yield incremental revenue growth for these investments that we've already made because we're only, at the moment, enjoying GBP 25 million plus revenue on that GBP 45 million of investment. Now, the only reason I pulled these facilities out rather than looking at our overall growth investment is that I can absolutely, clearly see the discrete incremental revenue from these investments. But there will be a similar profile of revenue build associated with all of our growth investment.
So when we read that across to the GBP 140 million that we've invested since the beginning of 2014, you'll see that there is capacity and investments already made which will contribute meaningfully to the group's continued revenue and profit growth going forwards. Chart 12 shows the group's development of free cash flow. First half cash flow always reflects a working capital outflow on receivables, given that the sales in June are somewhat higher than the equivalent sales in December. So in the first half of this year, we also had a working capital outflow from bonuses, where the cash is paid in half one, but the P&L charge is spread through the year.
Given lower cash bonuses that we paid out last year in 2017, we actually experienced a corresponding inflow last year, and that's why you see a difference then in the working capital performance in 2018 versus the corresponding performance in 2017. For the full year, we'd expect a more neutral position on working capital flows, which would really just reflect the rate of revenue growth at the back end of the year, that we'll see at the end of 2018 compared with the equivalent period at the end of 2017. Chart 13. At the full year, we gave guidance that our tax rate would be no more than 26.5%. Improving performance in the UK and China means that we've been able to utilize some of our historic losses, which has helped bring our tax rate down to 24.5%.
This is a rate that we should be able to maintain as a maximum tax rate for the foreseeable future. We're still uncertain about the precise implications on our tax rate of the US Tax Cuts and Jobs Act, so the tax rate could end up being lower at some point in the future, but in any event, will not exceed the 24.5% rate. Having paid out GBP 71 million between our ordinary and special dividends at the beginning of June, we ended the half year with GBP 5.6 million positive net cash. It's pleasing to see that it's a positive figure. We had GBP 20 million of drawings on our revolving credit facility at the end of June, which we expect to repay in the coming month or two. The balance sheet overall remains very strong. Now, back to Stephen for the business review.
Thank you, Dominique. Okay, let's move into this. This is a new chart that I'm putting up here, just to provide you with some three different slices of the business, give you an idea of what's going on. So we're actually showing the split in the growth between specialist and classical, as well as by sector and by geography. So you can see, through a three-way prism here into looking into our results. And here, you know, picking out the very first column, the 11% specialist technology is clearly, you know, a big driver of performance in this company going forward. And I think another one, which we will come back to in some detail, is that 9% in general industrial. Clearly, that's well ahead of industrial production, and we'll go into some detail about what's going on in there. Moving into aerospace and defense.
So we've got 3.6% growth in aerospace and defense, and civil aviation revenues are up 3%. I think that needs a word because one would expect the background growth in this business to be about 5%. That's sort of the running rate that we see. So it's only 3%. The issue that's going on here is the fact that the U.K. is growing really strongly, on the back of engine OEM. And in fact, we're expanding capacity in the U.K. We had suggested we would do that. We recently announced our new Rotherham facility, which is primarily aimed at direct OEM support there, but it's not dedicated. I mean, it's like our Derby facility is not dedicated, so we do take in other customers as well.
The Rotherham facility, when it's complete, will end up being three times the size of the Derby facility, so that gives you an idea of the kind of growth that we're expecting in here. The reason we're doing it is that, you know, we have long-term forecasts from our customers, particularly in the UK, and this is part of a program. We announced a 15-year long-term agreement, and this was part of it. The reason we have those long-term agreements is actually for the customer's benefit. It's not so much for us. It's so that they can lock in capacity and actually make sure that we can provide it to them. So we also did a similar agreement with Safran for exactly the same reason. We have other long-term agreements. We only announce them with the permission of the customers.
Most of our customers won't give us permission to announce them. Something to do with employee internal employee relations often. Going quite strong there, so then why only 3%? The answer's this. If we look at France first, we have three major points. So one is the UK, the other one is France, and the other one is the United States. France is a Safran Group issue. And what we find in France is that Safran actually are dropping off their CFM production to the point where actually they have one or two, actually two facilities, which are almost dedicated to CFM production, and they are actually coming right off. And we had a fairly reasonable position in French CFM production. And their LEAP production is coming on, but it's being offset by the CFM reduction. That's it. That's a French phenomenon. It's not a phenomenon in the United States.
What's happening in the United States is it's a story of two halves there, two pieces, I should say. What we have on the East Coast, where we have the, the LEAP, later part of LEAP production, if you like-if you look at the production, chain in the LEAP series-you know, our Northeast business is primarily focused on the later latter parts of it. So as engine assemblies go up, and what you're seeing in the stats at the moment is the LEAP engine assemblies improving slightly, and, and they're getting up to the required runway run rate. Northeast is doing well. What's offsetting it is on the West Coast, and the West Coast business is far further upstream. In other words, we're dealing here with the raw forgings and, castings on the West Coast.
There is a phenomenon in the industry at the moment, globally, but particularly in the United States, where forging and casting capacity is absolutely maxed out. So while the engine assemblies today are okay, there is a little bit of a headwind coming for the engine guys unless they can get this capacity sorted out. Believe me, there's a huge amount of effort in the industry going on about that. Now, for us, those are our customers. Until they get their capacity question sorted out in the U.S., we won't see that coming through. So that's what those two sort of suppressing factors on civil growth.
But I fully expect that as the changeover in France to LEAP finishes over the next couple of years, and as the U.S. gets their capacity sorted out on the raw materials side, we'll see this growth rate going up to 5%+. Okay? Defense revenues return to growth. Defense is not a big part of our business, to be honest with you. And I think I've said this before. Our defense business is not really conflict-driven in any way, shape, or form. We tend to do, you know, little bits and pieces into defense inventories, and it's just return to growth. Okay? Moving on then to energy. So, clearly, we've got continued sequential improvement in the North American onshore oil and gas, for that re-fracking, really, Permian Basin.
People say to me, "Well, you know, is it turning down or anything?" We don't see, and frankly, and I'll make this comment now and again, we don't see any weakness anywhere in our business. I just wanna make that clear. And we'll talk a bit more about that. The North American side is going quite well. It has had spectacular growth recently. It's not softening. We'll see where it ends up. I'm not, it's above my pay grade to actually call when that thing goes up or down. I have to ask you guys. Subsea revenues. We are seeing a turn up in Subsea. Now, this affects primarily our specialist technologies that are exposed to that. And, just to remind you, that's HIP product fabrication, where we're using powder metallurgy to produce Subsea components.
And it's also surface technology, where we're providing very hard-wearing and corrosion-resistant coatings, typically on downhole tools, and subsea work. That subsea revenues that they are showing, recovery, what we're seeing is that projects that were put on hold a couple of three years ago when the oil price decline happened, and even these were projects that were already released, and they stopped them, they're now back on. So we won these contracts pretty much some time ago.
We've had to re-bid them. No problem in doing that. They're now being released again, and we're back in production. And the, the order book, this is the only part of our business where we have any kind of order book, the order book is growing. So, you know, it, it, it's, it's coming back, but it's very early days there. The only counterpoint in this side is something we've already told you about.
I mean, when the OEMs announced that they were gonna cut back their large-frame industrial gas turbines, you know, we did say we'll see a slight hit back on that, and indeed, that's happened. In some ways, I'll say it again. I've said it before. It's a little bit of a blessing in disguise because one of the key constraints in our business at the moment in terms of capacity is HIP. You know, and HIPs cost a lot of money, and they take a long time to deliver. And the fact that the IGT work that's being HIPed has backed off a bit has actually given us a little bit of a breathing space because we were getting a little bit under pressure in different places. We've put more HIPs on order, and we'll talk about that in a minute. But large-frame, this is not a big downward issue.
In some ways, it's helped us a little bit. Let's look at automotive. So 9.4% constant currency growth. And in car and light truck revenue, 8%. It's well ahead of the market. So what's going on here? Because, you know, there are quite a few people say, "Well, they're calling top of the auto market, and things are soft," and everything. And let me just explain. So our position in automotive is far more dependent about what we do rather than background car production. You know, to be clear on that.
I mean, we have a tiny sliver of the total market in auto, as you can imagine. I mean, it's only GBP 110 million revenues in the half. And so what we've been doing, and it's been part of a proactive campaign for a number of years now, both in aerospace and automotive, is establishing a very focused sales effort.
And that sales effort has managed to get us onto new platforms. And we've had new platforms coming on stream now for the last few years and more to come. So these platforms are ramping up because they're new. And as those platforms come in, and they're replacing older platforms - and typically here, we're talking about drivetrains, brake systems, those kind of things - as those ramp up, we see growth that you don't see in the background market. That and that's one of the key drivers here. We also have a strong contribution from specialist technologies, and the specialist technologies growth is high. LPC is picking up quite well. And I think I said before, you know, if we look forward, these specialist technologies, they're not only used on current stuff, but they're increasingly being picked up on the EVs and the hybrids.
So this is, you know, this is a longer-term trend. If we look at the background market, it's quite interesting. So Europe, strong growth. What's happening in the United States? Interesting fact or factoid that I was told the other day is that the car production in the U.S. is at a 60-year low point. It's already there. Okay? It's been going down. But what you need to bear in mind is that offsetting that is the growth in SUVs and pickup trucks is offsetting it. So in fact, overall in the U.S., car production is flat. And that's important to note because people are just looking at cars, and they can see it falling down. But in fact, people, what they're doing is they're changing their driving habits as the Americans do, and they're moving over to the larger vehicles again.
So yeah, there's some background issues in the US, but it's not affecting us. Heavy truck has grown. It's a small part of our business. We don't focus on heavy truck. It's far too volatile. But it, you know, it's a little bit of a help in that. So the real story's car and light truck and well ahead of the market, and we expect that to continue. Now, let's look at general industrial. This is the largest part of our business, and it's growing at 9%. So let's go into that. I'll remind you that general industrial is our closest proxy to industrial production. Clearly, 9% growth is a little bit higher than industrial production, to say the least. We've got good growth across all of our markets. There isn't anywhere that's not growing.
Now, there's been a 2.5% of this 9% that's coming from specialist technologies. So, you know, let's just take that out of the piece 'cause that's very easy to explain. So what's driving the rest? A number of things. First of all, let's talk about restocking. I did mention that last year, we saw some signs of restocking. Now, you need to understand how do we see restocking? Few of our customers tell us they're going to restock. Some do 'cause they wanna give us warning, but they tend to be the big guys. And we have lots of customers. How do we see restocking? We see it because what happens is in a very short space of time, literally a week, the offtake from a customer will rise dramatically.
You know that they can't be turning their production up, and what they're doing is putting it into inventory. That's what we saw in the second half of last year. We saw these peaks coming through, and that clearly was, to us, an indication of restocking. The situation today is we don't see that anymore. So the actual restocking effect seems to have moderated. Now, undoubtedly, there are onesies and twosies Aeround the place. But as a pattern, we're not seeing that. What we are seeing is areas in general industrial that are growing which are CapEx oriented. So we're seeing, for example, industrial machinery, machine tools. You know, these are the CapEx cycle is kicking in strongly here. Mining, off-road vehicles, and agricultural, which is quite interesting. So this is all CapEx-driven.
The way I look at the CapEx stuff is what happens typically in our business, the first thing that comes on is the short-cycle stuff. And then as the cycle sort of progresses, you get into this heavier CapEx spend, and that's what we're seeing at the moment, which is quite refreshing. So overall, I think we're seeing not only the fact we can't see any, any declines here. We're actually looking forward, and we seem to be looking at a, at a, at a fairly long runway here, which is quite pleasing, driven by two things. One, as I've just explained in general industrial, but two, that a lot of the stuff that's going on here is things that we're doing as opposed to being done to us by the markets. Let's just pull out specialist technologies for a minute.
So it's GBP 86 million of revenue, growing at 11%. We've got strong revenue growth in LPC and S3P, and that's predominantly well, it's nearly all auto and GI. And that is a lot behind, what you're seeing in the growth in those segments. HIP PF and surface technology, as I mentioned before, that's a subsea issue, and they've turned positive. HIP services, growing but held back by, a little bit by this, IGT, decline. Then where are we going with this? Well, we're continuing to invest. This is one of our priorities of investment is in, specialist technologies. Not only do we do capital expansion, of course. This is a lot about revenue expansion. And just a word on the margin point. So, you know, as, as Dominique said, it's the AGI classical heat treatment margins that we've been pushing forward.
We aren't trying to expand specialist technology margins, and we aren't trying to expand in our ADE margins. So it's the AGI part. So here, you know, one of the reasons why don't these margins expand is 'cause we invest as fast as we can on the resources, human resources side, to keep this growing. And, and that, that's what this is all about. New capacity gone online in terms of the HIP capacity, HIP services that I mentioned before. So we added in the UK. Belgium is due for an expansion this year. We've got deliveries due this year, and we'll be online. And in the USA, we've got equipment on order that will go online next year. So we're moving ahead in that quite well. And of course, that's extremely profitable business too.
A nice underlying point here is that our barrier to growth in specialist technologies is adoption of the technologies. People have to switch from substitute technologies, and typically, they change their product design. And that's a big deal for a lot of people. So they have to switch a lot of things to take advantage of these specialist technologies. And I've always said that as soon as you get critical mass, the changeover starts because people more and more people start learning about it. And we can see that happening at the moment. So the actual pace of adoption of these technologies is growing, and that all augurs well for the future. So let's not leave classical heat treatment aside. It is a big part of our business. It is doing well, 8% constant currency growth. As I've said, we've got growth in all markets and regions.
I've talked about automotive. Oil and gas markets seem to be continuing, which is good. General industrial, I've gone into. We are continuing to invest, particularly in aerospace, where capacity requirements are expanding and also emerging markets. Now, let's just talk a little bit about the emerging markets. So we've got 22% growth in emerging markets. And if we look at China and Mexico, they're over 30%. What's driving that? I mean, you know, clearly, those emerging markets aren't, you know, growing at that rate. That's the result of a longer-term investment program that we've been putting in place. And we've been building facilities and expanding capacity there, bringing on new customers. Our Chinese strategy is basically one where we take Western companies that need the kind of quality that we provide. They don't want to build their own facilities in China.
They have no sources in China, and so we go to them, go with them to China. What we don't do, particularly, is sell directly to the Chinese companies. And what we don't do is sell to companies that try and re-export. So it's for local market consumption. The situation in Mexico is somewhat different. So in Mexico, it's almost entirely automotive. And what I can tell you, never mind what people say in the press and everything else, the rate of investment of our customers in Mexico is increasing, and the rate is increasing. It's not just the amount. And so we're seeing more and more investment going on in Mexico. For us, that's an opportunity both for general production but most importantly for our specialist technologies. We'll see where NAFTA goes, but I think if I was a betting man, Mexico is gonna be fine.
There's so much money pouring in there. It's unbelievable. And a lot of this growth here, this is a result of our investment programs and our strategy. So one would expect it to continue. So in summary, yeah, strong across the board. Very pleasing seeing the margins going up. And that is coming primarily out of our efforts in AGI. We have pricing efforts going on. We have operational efficiency efforts going on. And one would expect to keep it moving in that direction. And please don't ask me for targets. I don't do that kind of thing. Our cash generation remains strong. And the results overall, as I think I've pointed out, this is the result of the stuff that we've done. It's not a self-help program. I mean, let's not get it. We're not trying to fix problems here.
What we're trying to do is generally grow the business. And it's, it's working. You remember that we started I mean, Dominique's quoted you from 2014. Why 2014? Those of you that followed us for a long time, I stood up here, and I said, "We can see a decline coming in the general markets, and we're not gonna take it. So we're going to invest for our own, growth." So we invested into the decline, and that's what this growth is all about. So looking ahead, more to come, particularly in auto and civil aviation. And specialist technologies have got a great future, no doubt about it at all. The other thing which I'll put in there as a little bit of an end of sentence, we are also, of course, looking at inorganic opportunities as well as organic. Here's the outlook statement.
It's fairly straightforward. The point about the investment, just to make the point, it's not just capital. It is people. Okay? With that, I think, we'll take questions. Michael?
I got the mic first.
Oh, all right. Somebody else chose you for me. That's okay. Carry on, Andrea.
Just a couple of questions. Firstly, on the facilities, new facilities ramp-up, how do you think about that kind of over the next three years, versus the history, i.e., do you expect to open similar amounts? And specifically for second half, I think you haven't opened very many in H1. Do you expect to catch up in second half? Should we think about the margin implications from that?
So, we continue to put new facilities down. Okay? We've got a couple coming online, and we have a few more in the pipeline. The biggest issue on the facilities tends to be we get a plant. We get a customer. And then the biggest issue is dealing with the local authorities in terms of getting permission to operate. And believe me, that is a real headache. You wouldn't believe it, but that is the long job. So more to come. I would expect to see a similar rate, but we're building all the time because the, you know, the lag on these facilities, they take about three years before they really start to move. And so it just keeps going and going and going. And if we keep adding onto it, it's just all incremental.
So, I don't tend to look at the new facilities from a first half, second half perspective. This is a long-term program. I would be looking further forward than that. You got anything to add on that?
Well, just in terms of margins, we're adding costs at the same time we're adding revenue. So the margin implications from the ramp-up of the new facilities tends to be pretty neutral.
Yeah. We don't get a lot of operational gearing on it, for sure.
Great. And just to follow up to the previous discussion on AGI profitability in North America, you identified, I think, two sites there that are problematic. You've got a plan to fix it. Could you just share a bit more detail on that and also on the degree of impact? I mean, how, if we think about the historic context, I think those margins used to be 4,500 basis points higher. How much of that decline is explained by those two sites?
So, let me tell you what the problems are. One is a relatively new site that was created out of a merger of two older sites. What they have are digestion problems. And I think where we slipped up on that is that basically our customer service went downhill. And this business is all about customer service. And so that particular plant, it's in a very healthy spot. We just need to get our own act together. Both these plants are significantly negative, okay, just to make that point. The other plant is a very old plant, and what's happened there is that the technology is quite old, really quite old. And there's been a movement of the infrastructure Aeround it in terms of customers and the hinterland, and technology's overtaken it. So what we have to do is give that a complete rework.
So we will be effectively taking out the old technologies and putting in new technologies, and we will be putting in specialist technologies there too. So that's what the detail of it is. In terms of your 500 basis points, that sounds like a CFO question to me.
Yeah. So we our operating profit for North American AGI in the first half is just over GBP 5 million. If you've got two large, underperforming plants, that has a significant impact on those numbers. So, you know, if we stripped out the impact of those two, it would certainly add at least 5 percentage points of margin.
I mean, the rest of North American AGI is pretty good, actually. So, you know, it's quite localized.
Great. Thank you.
Michael.
Michael Blogg from Investec. The growth you're seeing now in specialist technologies, perhaps sort of intellectually, we always assume that that should grow faster, but it hasn't in the last couple of years. Apart from subsea starting to move, what is really driving that? Are there any particular of the technologies in there that are really moving the needle, or is it relatively broad?
So the answer is it's relatively broad. I would say that S3P and LPC in particular are really going, you know, quite strongly, but it's pretty broad. And of course, the issue that we had previously, why it wasn't in double digits. I mean, you know, just to restate it, I expect these businesses to do 15% compound annual growth for many years to come. Okay? The issue that we've had over the last three years was oil and gas. And two of the specialist technologies have been in the past quite heavily exposed to that, one of which is the HIP product fabrication. And of course, we brought out our PowderMet technologies, and they're associated with our HIP product fabrication business.
We told you when we announced this, you know, so not very long ago, that Powdermet would not add to the numbers for the three years. And, you know, I'll reiterate that. It is quite exciting. We've got a lot of demonstrator parts being produced for people, more and more people taking interest. But commercial production in effectively additive manufacturing has yet to really take off, and not just for us, for everybody. There's a lot of hype out there. It's still early days. But generally, specialist technologies, we would expect this growth kind of growth rate to continue and perhaps even accelerate.
Among the noise coming from additive manufacturing, I've picked up some comments that some of the players would like to get rid of the HIP phase if they could. Is that a realistic threat, or is that just pipe dream?
I can see why you might want to do it. Okay? I mean, certainly from a price perspective to a customer, it isn't cheap. The people that are most advanced is General Electric, for sure. General Electric do 100% HIP. They have tried like crazy using both modeling techniques and by doing inspection to try and eliminate HIP. And they have an advantage because the best way of inspecting this stuff is using magnetic resonance imaging, and they make the damn things, right? Most people will not spend $2.5 million on an MRI unit to actually check out their parts. And what's more, GE even found then that they couldn't really find the defects. So is it realistic you will find in non-critical parts that people will avoid HIPping, and they'll take the chance?
and maybe the yield rate will improve, but they still won't eliminate it. I find it difficult to see how they would eliminate it. Yeah. We've been working in powder for a long time, and it's very difficult to eliminate 100% of this stuff. And critical stuff, you know, notably aerospace or anything that's taking stress like that, it's gonna be HIPped, would be my view.
Is the alternative just overbuilding the component?
Not really because you can make a component as big or as have as many strengthening parts if you like. If you've got a break in the middle, it'll break. You know, what happens is you get what they call crack propagation sites, which can be tiny, but all you do is fatigue it a bit, and it goes boing and breaks. It doesn't go boing, but you know what I mean.
Thanks for the demo.
back over here. Andy.
Hi. Good morning. Andy from Jefferies. Four questions, if I may. With respect to Subsea, yeah. They're all short. Quick ones. With respect to Subsea, do you think this is the start of a multiyear cycle, or are we just winning kinda one or two nice orders that have come through?
Okay. So, the work that we are getting on Subsea are contracts that have previously been released, and had their final investment decision. Okay? In terms of new projects coming on stream that have yet to get FID, we are certainly quoting a lot. Whether they will or not, I don't know. I'm fairly confident that the gas fields will. I don't know about the oil fields.
Okay.
I'm not an oil expert, but by any means. But gas, fundamentally, is quite economic to do this way. And so I think the gas fields, of which we have quite a number of the orders we've got are on gas, actually.
Okay. All right. With respect to labor inflation, I mean, previously, you've talked about a couple of pinch points in the U.S. and oil and gas particularly.
Yeah.
Any concerns that you have there in terms of labor inflation, rates?
Not really.
This year. They're just slow, right?
No. No. I mean, we are seeing labor inflation. I think our advantage was we saw it coming.
Yeah. Correct.
We're keeping pricing ahead. And just a note as to how we do pricing, I mean, we are not a what I call list price-based company. We don't say, "All our prices are going up X%," because, you know, that's asking for trouble. What we do is that right throughout the year, we go by customer, by customer, by customer, and we tailor the price increase to what we think they can stand and what our margin is, are the two big factors there. And it's part of the Bodycote margin model. So that's how we keep our pricing ahead of inflation. Certainly, then once inflation is accepted in the marketplace, the first thing that happens is that customers try really hard from their purchasing departments to push it down.
Sometimes they get, by the way, our prices are not going down, just to clarify, but they try really hard. And then there's a sort of an acceptance issue, and then it becomes easier. And because our only real inflation is labor, we have no material cost inflation, it tends to be the conversations get easier. Having said that, we've been helped a little bit in Europe because in Europe, what we do is we do typically two-year contracts. We put in very good contracts in place before the inflation hit. And so really, if there's gonna be an issue, it'll be predominantly France and Germany in 2019. And clearly, we are working very hard ahead of that, so.
Great. On the differential, what's the order?
Third one is just on.
The M&A outlook.
Oh, okay.
You've talked about having to put more investment in the business because, yeah, M&A's a bit trickier. What's the environment looking like then? I mean, I guess things are pretty good at the moment, so there's no real change, but.
Yeah.
Do people worry about tariffs, Brexit, whatever it may be? And I look at sell now?
No. Well, I don't think in our industry, tariffs are an issue. We run a local business. And, yeah. So we may see, you know, maybe the production moving from one country to another, so we lose it in one move, pick it up in the other. So overall, we don't see tariffs as a huge issue, frankly. The only issue I can see coming out of the tariff question is if it dents global growth. And clearly, that will hit us and everybody else. But in terms of the M&A side, so when things started turning up, there were quite a number of the private owners of the bolt-ons that said, "Well, hold on a minute. You know, we can, we'll keep this for a bit." That happened. You're not seeing an increase in prices.
These guys, somehow, they don't work like that. But we are seeing them come back a bit, and we do have a pipeline. But obviously, don't expect me to say whether we're gonna make an acquisition or not. It's kind of out of our hands. The second part of our acquisition strategy are larger acquisitions, particularly in things like specialist technologies, where there are few. And we've always talked about one, which I think everybody knows about. We have another one in the sights. The current talk and who, you know, who knows is that these are next-year items, not, not this year items.
Thank you very much.
Gates coming.
Good morning. Hi. It's Jonathan.
Good morning, Frank. Just coming back to that M&A answer that you gave, and particularly sort of large-scale acquisitions, can you just remind us what your hurdle rates are in terms of large-scale M&A?
So we've never said. That's the easy answer to that. Our hurdle rates on everything else is 20%. Okay? And we risk-adjust it. On the larger ones, I think the biggest issue isn't the actual rate of return. It's the time scale. So we judge our, our rates of returns typically over a five-year period. And if you're gonna do a big acquisition, you're never gonna do that. So, you know, we would be extending our time horizon out there. But one thing is for sure, these larger assets, I am sure they will be heavily competed for because they fit right into the private equity spot. So PE will be in there. And the problem with PE is, you know, they aren't necessarily rational all the time. I don't know how some of them make their decisions, frankly, but I'm not a PE guy.
You don't look to us for that. We will be completely rational, and we know you know, we're not overly aggressive people. So if we do consummate one of these, it will be a very good deal for the company and the shareholder.
The second question, just coming back to that sort of operational improvement and the Bodycote margin model, where we.
Where are we on rolling out across the business? I think you're embedding it within the RP, which hopefully is part of the process.
Yeah. It's become a daily thing now. It would be nice to say to you, "We're 20% done or 50% done." I couldn't tell you. People use it as a daily tool, and it's really how fast they get through it. And of course, we have a churn rate of customers, so you have to do it on all the incoming customers as well.
Okay.
It's now, I think, embedded as a discipline in the company, whether or not it's in a particular, you know, local ERP system or not, you know, their local variety. But it is part of the daily, daily chore, as it were. And that's why you see the margins going is one of the yeah, one of the big issues.
Great. Thanks. Back over there.
Hey. It's Andrew at Barclays. On the outlook on growth, obviously, you mentioned the comp effect at the end of the half versus the start. As we move into the second half, do you see sort of your business staying at the current level as it did through 1H, and then we just have this comp effect reducing the growth rate, or do you see potential for an acceleration with some of the other industrial names we've been talking about?
Well, obviously, we've shown our new facilities there, and we are ramping up growth in those new facilities, and that, therefore, should add to our base business. But on the rest of our business, we are not assuming another leg up in the second half, but because clearly, in the comparable period last year, we did see that happening, then the relative growth rate should drop.
Thank you.
Morning. It's Robert from Morgan Stanley. A couple of questions. Just in thinking about the margin mix in ADE, especially given that you mentioned oil and gas kinda showing particularly strong growth, you've got subsea starting to come back. Could you just give us a color on, I guess, the not necessarily what the margins are, but the mix of the margins with onshore versus subsea.
So.
versus the other parts of the business?
Very easily. So classical heat treatment margins are agnostic as to market sector in terms of what their margins are. So even though you've got onshore oil and gas growing, you don't see you know, the individual customer margins don't change. They're about the same across all the market sectors. So market sector change for classical heat treatment has no impact. Okay? The reason why in total, ADE are where they are is because, of course, they've got HIP in there, and HIP is greater than 30% margin. And that's what takes it up another leg because otherwise, it would be low, just over 20%. Okay? And it's up at 23%, if I remember. In terms of what other elements will improve the mix, well, you've got HIP itself, but then you've also got the subsea.
So to the extent that Subsea comes back, those are superior margins. And that's only because those are specialist technologies. It's more of a specialist technology classical heat treatment mix than it is about any particular market sector.
Great. And then I guess just fleshing out, I know you always sort of struggle with the general industrial business given you're in so many different, sort of end markets there.
I wouldn't say struggle.
Maybe just a little bit of color Aeround, just from a sort of top-down perspective, how you see this sort of mix between heavy industry CapEx and more, what you call, kind of traditional industrial short-cycle businesses within there, if you could give us a bit more color?
Yeah. Yeah. I can do that. In fact, I probably haven't got the numbers yet. So the areas where we're seeing big CapEx are the largest segments, and they are agriculture. I don't know if I mentioned this. You might remember that when the sanctions on Russia came into place, agricultural equipment, new equipment, actually sagged. And the reason for that was that, the U.S., which is, is predominantly where our agricultural business is, the U.S. could not export their second-hand equipment, and the second-hand equipment always went to Russia. So because that dried up, what happened is the farmers effectively started milking their equipment longer sorry, that's a bad term. But, yeah, using their using their equipment longer and scavenging spare parts. And so what we saw was spare parts revenues, 'cause obviously, we do both, right? Spare parts revenues, growing.
And to be clear, our margins on spare parts are the same as our margins on new equipment. There's no mix effect there. But we saw spare parts growing and then leveling a bit. And what's changed now is basically a lot of that equipment has really gone end of life. So they're now investing in new agricultural equipment. So there's one sector, and it's pretty large. So I'm not gonna give you the exact numbers, but I mean, that's it's over 10% of that. The other big areas is machining and industrial machining, machinery. And that is basically broad-based capital expansion. Okay? And mining and tooling is another big one. And you know, tooling, you might think tooling is I'm not talking about drills, guys. You know, I'm talking about, you know, big tools.
That tooling, it is a big capital expenditure for people, and that is growing quite as well. So, you know, just eyeballing the whole lot here, it's over 50% of it is in capital-intensive areas.
And just maybe in terms of the regional distribution of general industrial, where you're seeing relative strengths and weaknesses, are there?
It's the same.
Okay.
It's the same. It's right across the board, actually.
Mm-hmm.
So.
Thanks. Anybody for any more? No? Okay. Well, thank you very much, everybody. Appreciate it. And, enjoy the warm weather. And we'll go from there. Thanks a lot.
Thank you.